Intuitive Surgical Inc (ISRG) — Q3 2017 Earnings Call Transcript

Thank you. Good afternoon and welcome to Intuitive Surgical's third quarter earnings conference call. With me today we have Gary Guthart, our President and CEO, Marshall Mohr, our Chief Financial Officer, and Patrick Clingan, Vice President of Finance and Sales Operations. Before we begin, I would like to inform you that comments mentioned on today's call may be deemed to contain forward-looking statements. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties. These risks and uncertainties are described in detail in our Securities and Exchange Commission filings, including our most recent Form 10-K filed on February 6, 2017, and 10-Q filed on July 21, 2017. These filings can be found through our website or at the SEC's EDGAR database. Prospective investors are cautioned not to place undue reliance on such forward-looking statements. Please note that this conference call will be available for audio replay on our website at intuitivesurgical.com in the Audio Archive section under our Investor Relations page. In addition, today's press release and supplementary financial data tables have been posted to our website. Today's format will consist of providing you with highlights of our third quarter results as described in our press release announced earlier today, followed by a question-and-answer session. Gary will present the quarter's business and operational highlights, Marshall will provide a review of our third quarter financial results, Patrick will discuss procedure and clinical highlights, then I will provide our updated financial outlook for 2017, and finally, we will host a question-and-answer session. With that, I will turn it over to Gary.

Good afternoon and thank you for joining us on the call today. As you know, Intuitive is focused on significantly improving surgery and enabling access to our products and services in pursuit of this mission globally. Performance in the third quarter was strong, with continued growth in customers' use of our systems and an increase in system placements. Worldwide growth in procedures for the quarter was 15% over the third quarter of 2016. As we have described on prior calls, we expect growth in general surgery and countries outside the United States to continue to lead performance, while procedure growth in mature categories in the United States temper. In the quarter, we saw this dynamic with strength in general surgery in the U.S. and in several countries outside the U.S. lifting growth, while U.S. urologic and gynecologic growth moderated. Drivers of growth include U.S. inguinal and ventral hernia repair, colon and rectal surgery, and thoracic surgery, as well as urology and gynecology procedures outside the United States. Procedure performance in Asia showed continued strength with solid growth in China, Japan, and Korea. Overall European procedure growth moderated slightly from its first half of 2017 performance, with trends varying by country. Patrick will take you through these factors in more detail later in the call. Turning to capital placement performance, the third quarter was a strong one with growth in total placements from 134 in Q3 to 169 this quarter. Customers in the United States again showed strong interest in our systems as capital placements grew quarter-over-quarter. Asia, Europe, and other market system placements were roughly in line with prior quarter trends. Capital placements can be hard to forecast, and we expect this lumpiness to continue given conditions in the market. Our fourth generation systems, da Vinci X and da Vinci Xi, continued to perform well and account for over 85% of systems placed in the quarter. Marshall and Patrick will take you through system dynamics in greater detail. Turning to profitability for the quarter. Our Q3 pro forma gross margins rose slightly relative to Q2 and are slightly above our expected range for the year. This is due to strengthened procedures and improvements in our operational efficiency. Our fixed cost growth met our plan year-to-date with increases in R&D expenses, growth in staff in European and Asian markets, investments in clinical trials, and growth in corporate competition capabilities. Our third quarter pro forma operating results are as follows: procedures grew approximately 15% over the third quarter of last year. We shipped 169 da Vinci surgical systems, up from 134 in the third quarter of 2016. Revenue for the quarter was $806 million, up 18% from the prior year, which included a release of reserves related to da Vinci X trade-out offers of $21 million. Instrument and accessory revenue increased to $401 million, up 15%. Total recurring revenue in the quarter was $548 million, representing 68% of total revenue. Pro forma gross profit margin was 71.8% compared to 73.1% in the third quarter last year, the difference largely driven by a medical device tax refund in 2016. Pro forma operating profit was $347 million in the quarter, up 13% over Q3 of 2016. Pro forma net income was $324 million aided by one-time favorability and tax items. And lastly, we completed our three-to-one share exchange announced last quarter. Marshall will take you through our finances in greater detail shortly. Turning to operations, we believe that substantial opportunity exists to enable more minimally invasive surgery, better outcomes, and to expand access to our technologies globally. Our investments in new products and services are built on this belief. Starting with our multi-port product portfolio, recall that we have built a tiered product offering in our da Vinci systems that responds to our customers' desire for choice in content and price points while maintaining logical upgrade pathways to our leading ecosystem of robot-assisted surgery products and services. We continue to bring our da Vinci X systems into new regions in the world. In the quarter, we enabled launch in nine additional countries for da Vinci X and anticipate adding four more in this fourth quarter. This set of options has been well received by our customers, with da Vinci Xi making up roughly 75% of our new placements, da Vinci X making up approximately 10% of new placements in its limited early launch, and with the balance made up by Si technology. We are also advancing our imaging, instruments, and accessories portfolios for our generation four systems—the da Vinci X, da Vinci Xi, as well as da Vinci SP. While the robotic arms are the most visible part of the surgical system, it is the performance of the whole ecosystem of robots, software, imaging, instruments, and accessories in conjunction with the OR team in their working environment that creates a high-functioning program. Our team is committed to understanding the total surgical environment and its workflow and designing products that work seamlessly for our customers. This has motivated our investment and partnerships in technologies for imaging, stapling, and more recently in advanced energy, working to develop highly effective and easy-to-use total products. In the quarter, we expanded the launch of two additional instruments and accessories for da Vinci X and Xi into seven different countries and initiated a limited launch of a refined vessel sealer in Europe. We anticipate that our da Vinci SP program will complete patient enrollment in surgery for its round of clinical trials this quarter. As we mentioned last call, four clinical trial sites participated, three in the United States and one in Asia. Cases in Asia included transoral, urologic, and colorectal surgery, while those in the U.S. focused on transoral surgery. Our teams are finalizing product validations or working to establish manufacturing capability in support of regulatory submissions that enable launch. We plan to file our first 510(k) for the current SP design by year-end, with follow-on submissions for additional indications thereafter. For our flexible robotics program, we continue to refine product designs, develop our supply chain, finalize our regulatory strategy, and initiate testing. With our partner, we are progressing and building our joint venture in China, with the hire of the first key staff including the joint venture CEO and CFO. In closing, the third quarter of 2017 was a strong one and we remain focused on the following for the balance of the year: first, continued adoption of da Vinci in general surgery; second, continued development of European markets and access to customers in Asia; third, advancing our new platforms imaging, advanced instruments, da Vinci SP, and flexible robotics progress; and finally, support for additional clinical and economic validation by global region. I will now turn the call over to Marshall who will review financial highlights.

Thank you, Gary. I will describe our results on a non-GAAP pro forma basis, which excludes specified legal settlements and claim accrual, excess tax benefits related to employee stock awards, and charges associated with stock-based compensation and purchased IP. We provide pro forma information because we believe that business trends and operating results are easier to understand on a pro forma basis. I will also summarize our GAAP results later in my script. We have posted reconciliations of our pro forma results to our GAAP results on our website. Third quarter 2017 revenue was $806 million, an increase of 18% compared with $683 million for the third quarter of 2016 and an increase of 7% compared with second quarter revenue of $756 million. Included in third quarter revenue was the recognition of $21 million of revenue deferred in conjunction with the da Vinci X trade-out program we offered certain first quarter customers. Excluding the $21 million, revenue would have increased 15% compared with 2016. We expect the remaining $2 million of deferred revenue under the first quarter trade-out program to be recognized by year-end. Third quarter 2017 procedures increased approximately 15% compared with the third quarter of 2016 and decreased approximately 2% compared with last quarter. Procedure growth relative to last year was driven by general surgery in the U.S. and urology worldwide. The decline in procedure relative to the second quarter primarily reflects seasonality. Patrick will provide more detail concerning procedure adoption. Revenue highlights are as follows: Instrument and accessory revenue of $401 million increased 15% compared with last year and increased 1% compared with the second quarter of 2017, which closely reflects procedure growth. Instrument and accessory revenue realized per procedure was approximately $1,880 per procedure compared with $1,870 last year and $1,830 last quarter. The increases reflect increased sales of our stapling and vessel sealing products and variations in customer buying patterns. Excluding the recognition of deferred revenue, systems revenue of $237 million increased 15% compared with the third quarter of 2016 and increased 9% compared with last quarter. The year-over-year increase primarily reflects higher system placements, partially offset by a higher number of operating lease placements and lower average selling prices. The quarter-over-quarter increase reflects higher average selling prices and fewer lease placements. 169 systems replaced in the third quarter of 2017 compared with 134 systems in the third quarter of 2016 and 166 systems last quarter. 20 systems were placed under operating lease transactions in the current quarter compared with 15 systems in the third quarter of 2016 and 27 last quarter. As of the end of the third quarter of 2017, there were 134 systems out in the field under operating leases. We generated approximately $7 million of revenue associated with operating leases in the quarter compared with $4 million in the third quarter of 2016 and approximately $6 million last quarter. We generated approximately $11 million of revenue during the quarter from lease buyouts compared with $13 million in the third quarter of 2016 and $5 million last quarter. Globally, our average selling price, which excludes the impact of operating leases and lease buyouts and revenue deferral, was $1.47 million compared with $1.53 million last year and $1.46 million last quarter. The decrease in ASP compared to the third quarter of 2016 primarily reflects a higher proportion of trade-in transactions, lower priced systems sold to cost-sensitive market segments, and lower pricing offered to customers purchasing multiple systems. We believe the flexible financing programs like operating leases have positively impacted our ability to grow our installed base. While the number of leases is difficult to predict in the short-term, we expect a proportion of these types of arrangements will increase over time. Service revenue of $147 million increased 13% year-over-year and increased approximately 3% compared with the second quarter of 2017. The year-over-year and quarter-over-quarter increases reflect growth in our installed base of da Vinci systems. Outside of the U.S., results were as follows: Third quarter revenue outside of the U.S. of $213 million increased 13% compared with $189 million for the third quarter of 2016 and increased 4% compared with $205 million for the second quarter. Approximately $5 million of deferred revenue recognized in the quarter was outside the U.S. Excluding the deferred revenue recognition, the increase relative to the prior year primarily reflects increased system placements net of leases and increased instrument and accessory revenue. Outside of the U.S., we placed 62 systems in the third quarter compared with 49 in the third quarter of 2016 and 63 systems last quarter. Four of the system placements in the current quarter were operating leases compared with one last year and five last quarter. Current quarter system placements included 25 into Europe, 14 into Japan, five into India, four into Mexico, and one into China. System placements outside the U.S. will continue to be lumpy as some of the OUS markets are in the early stages of adoption. Some markets are highly seasonal, reflecting budget cycles or vacation patterns, and sales into some markets are constrained by government regulations. Moving on to the remainder of the P&L, the pro forma gross margin for the third quarter of 2017 was 71.8% compared with 73.1% for the third quarter of 2016 and 71.3% for the second quarter of 2017. The da Vinci X trade-out program had little impact on our margins. The decrease compared with the third quarter of 2016 primarily reflects a $7 million medical device tax refund received in 2016 and decreased service margins associated with higher scope repair costs. The increase compared with the second quarter primarily reflects leverage achieved with higher production levels. Future margins will fluctuate based on the mix of our new products, mix of systems in instrument and accessory revenue, our ability to further reduce product costs and improve manufacturing efficiency, and the reinstatement of the medical device tax in 2018. Pro forma operating expenses increased 21% compared with the third quarter of 2016 and increased 2% compared with last quarter. The increases reflect our planned investments in product development, specifically da Vinci SP, flexible robotics, imaging, and advanced instrumentation, and the expansion of our OUS markets. Our operating expenses for 2017 may grow slightly greater than previous guidance, reflecting higher revenue growth. As we have indicated, we are committed to reducing the growth rate of operating expenses in 2018 compared with 2017. However, as 2017 revenue growth and, in turn, operating leverage have exceeded our expectations, it is likely we will not create operating leverage in 2018 over 2017 actual results. Our pro forma effective tax rate for the third quarter was 9.5% compared with an effective tax rate of 22.7% for the third quarter of 2016 and 29.2% last quarter. The third quarter of 2017 and 2016 included reductions of $68 million and $16 million of reserves related to the expiration of statutes of limitations on certain tax years. Without these reductions, our third quarter 2017 and 2016 pro forma tax rate would have been 28.6% and 27.7%. Our tax rate will fluctuate with changes in the mix of U.S. and OUS income and with the impact of one-time items. Our third quarter 2017 pro forma net income was $324 million or $2.77 per share, compared with $246 million or $2.06 per share for the third quarter of 2016 and $228 million or $1.98 per share for the second quarter of 2017. All per share amounts reflect the three-for-one stock split affected in October. Recognition of the $21 million of deferred revenue net of cost and income tax increased GAAP and pro forma net income per diluted share by approximately $0.09. The income tax reserve reversal of $68 million increased GAAP and pro forma net income per diluted share by approximately $0.59. As I indicated earlier, pro forma income provides an easier comparison of our financial results and business trends. I will now summarize our GAAP results. GAAP net income was $298 million or $2.55 per share for the third quarter of 2017 compared with $211 million or $1.77 per share for the third quarter of 2016 and $222 million or $1.92 per share for the second quarter of 2017. GAAP net income included $10 million of net charges associated with legal settlements compared with no charges recorded in the third quarter of 2016 and $5 million of net benefit recorded last quarter. GAAP net income for the second quarter of 2017 also included a charge of $6 million associated with purchased IP. These costs are excluded from our pro forma result. Beginning in 2017, we are required under GAAP to report the excess tax benefits or deficiencies associated with employee stock awards in our tax provision rather than as an adjustment to paid in capital as in prior periods. The excess tax benefit included in our GAAP result for the third quarter was $20 million contributing $0.17 per share, compared with $31 million contributing $0.27 per share in the second quarter of 2017. We have excluded these benefits from our pro forma results. This amount will fluctuate quarter-to-quarter based on the volume of employee stock option exercises, the number of RSUs vesting, and the value of our stock. We ended the quarter with cash and investments of $3.8 billion, up from $3.4 billion as of June 30, 2017. The increase generally reflects cash generated from operations. The accelerated stock buyback agreement we entered into in the first quarter will close in the fourth quarter. Based on our current stock price, we will be required either to deliver shares or pay cash to close out the arrangement. And with that, I would like to turn it over to Patrick who will go over procedure and clinical highlights.

Thanks, Marshall. Of our third quarter procedure growth of 15%, U.S. procedures grew approximately 12% and outside of the United States procedures grew approximately 23%. Procedure trends were consistent with the first half of the year, with growth led by U.S. general surgery and global urology. During the quarter, in the United States, strength in general and thoracic surgery continued; growth in mature procedure categories moderated; there was one fewer weekday; and we estimate that hurricanes impacted U.S. procedure growth rates by less than 1%. In U.S. urology, the third quarter growth rate for da Vinci prostatectomy was similar to the first half of 2017. We believe that our U.S. prostatectomy volumes have been tracking to the broader prostate surgery market. During the quarter, growth in kidney procedures moderated compared to the first half of the year. In U.S. gynecology, third quarter procedure growth was flat compared to the prior year. Compared to the first half of 2017, the moderation in third quarter procedure growth was due to benign procedures. Third quarter U.S. general and thoracic surgery procedure adoption remained strong, led by growth in hernia repair. Hernia repair continues to contribute the largest volume of new procedures in the United States, with solid contributions from colorectal and thoracic procedures. Turning abroad, procedure growth outside of the United States was approximately 23% in the third quarter led by the global adoption of da Vinci prostatectomy with solid contributions from kidney procedures, hysterectomies, and colorectal resections. Procedure growth was strong in Asia and variable by country in Europe. The one fewer weekday compared to the third quarter of 2016 was partially offset by the timing of certain regional holidays. Outside of the United States, procedure growth was led by China, South Korea, Germany, and Japan. Procedure growth rates in China moderated despite continued strong expansion in system utilization. System placements remained constrained pending the issuance of a new quota for civilian hospitals. We have no update regarding the status of the quota. In South Korea, growth was led by gynecology and urology, including contributions from single site use in gynecology. In Germany and Japan, procedure growth rates in the third quarter were similar to the first half of 2017, led by the adoption of urology procedures. During the quarter, recently placed da Vinci X systems generated solid utilization. The systems were largely used in urology and gynecology procedures with general surgery procedures in the United States. Globally, evidence continues to build in support of clinical and economic validation of da Vinci surgery. During the quarter, an economic analysis studying the impact of da Vinci hysterectomy in Denmark was published in the Journal of Robotic Surgery. The work was completed by a team of researchers from Aarhus University and Odense University. Comparing more than 7,600 hysterectomy patients across open, laparoscopic, and da Vinci surgery, the authors compared the comprehensive cost of care from the year preceding to the year following a hysterectomy for benign or malignant conditions. For benign procedures, the authors found that da Vinci hysterectomy was less expensive than either open or laparoscopic procedures. For less complex malignant procedures, da Vinci hysterectomy was more expensive than laparoscopic procedures and less expensive than open surgery. Within this population, the authors determined that the da Vinci patient cohort was more complex than the laparoscopic cohort and largely replaced open surgery at most institutions. In conclusion, the authors stated, 'Our study demonstrates that the use of robotic technology for hysterectomy is potentially cost-saving from a broad healthcare perspective.' This concludes my remarks. I will now turn the call over to Calvin.

Thank you, Patrick. I will be providing you with our updated financial outlook for 2017. Starting with procedures, on our last call we estimated full year 2017 procedure growth of 14% to 15% above the approximately 753,000 procedures performed in 2016. We are now increasing our estimate for 2017. We now anticipate full year 2017 procedure growth within a range of 15% to 16%. In regards to system placements, although the proportion of Q3 systems placed under operating leases was slightly lower than Q2, we continue to expect that over time the proportion of systems we place under operating leases will generally trend upwards. With increasing placements in the cost-sensitive market segments, we expect that our average system selling price will continue to trend gradually lower. As Marshall mentioned, $21 million of the $23 million deferred in Q1 related to our da Vinci X trade-out program was recognized in Q3. We expect to recognize the remaining $2 million in Q4 and close out the program. Turning to gross profit. On our last call, we forecast 2017 pro forma gross profit margin to be within a range of between 70% and 71.5% of net revenue. We now expect to come in at the top end of the range and anticipate pro forma gross profit margin to be between 71% and 71.5% of net revenue. Turning to operating expenses. As we have described previously, we have accelerated our investments in several strategic areas that will benefit the company over the long term. Accordingly, we have ramped our operating expenses as we focus on execution. On our last call, we forecast pro forma 2017 operating expenses to grow at the higher end of the range between 17% and 18% above 2016 levels. We now expect pro forma 2017 operating expenses to grow between 18% and 19%. We continue to forecast our non-cash stock compensation expense to range between $200 million and $210 million in 2017, as communicated in our last call. We expect 2017 other income to be at the top end of the $35 million to $40 million range forecast on our last call. With regard to income tax, we now expect our Q4 2017 pro forma income tax rate to be between 26.5% and 28.5% of pretax income, compared to our previous guidance of 28% to 29.5%. That concludes our prepared comments. We will now open the call to your questions.

Thanks. Can you hear me okay, guys?

Yes.

Let me start with your new thoughts on 2018 actually and to hit that to make sure we had it clear. So I think in the past you were talking about higher OpEx spending this year and then normalizing in 2018. That's how we started the year. What are you thinking about OpEx spending for 2018? In the comments that you made and historically it would have been high single digits would have been normal? What do you consider to be the new target?

Yes. I think what we have said is that we would expect, as you said, return to normal spending next year, normal being defined as something that's more in line with revenue growth. I think that what we are seeing this year is, we are outperforming on the revenue line and we wind up with much higher leverage than we had expected and therefore higher profit margins. And so if we continue our spending, even if we decrease the rate of spending next year or the rate of increase next year, you still wind up with not achieving leverage as maybe we were indicating before. So it all has to do with where we are coming out this year relative to next year. In total, if you looked at plans on a two-year basis from last year to next year, it's really pretty consistent with that.

Okay. And then just on the installed base in the U.S., it's now three quarters in a row that you had really strong numbers, especially new additions to the installed base. I think it's almost doubled what we saw last year. So I think you guys will always point us to procedures as the key leading indicator. But I am wondering if there is any additional insight as to why it's been so strong so far this year and how much does that growth in the U.S. installed base improve your confidence for U.S. procedure growth over the next 12 months?

Yes. You took some of the words right out of our mouth. Procedure growth really does drive placement growth. So we kind of think of it in that order. And procedure growth, we have talked about what that's been. It's been strong over the last few quarters. And to-date, 85% of our system placements have been to existing hospitals with roughly two-thirds of that expanding the installed base. So what we are seeing is hospitals growing procedures, having a need for additional capacity and therefore buying systems. 90% of systems we have sold are fourth generation, as Gary indicated, so Xi and X. And what we see there is that people want to avail themselves of the latest capabilities including computer-aided setup, optimized advanced instruments, and table motion and multi-quadrant access. So it's a number of factors that are driving it. It's hard to predict. We don't give you guidance on systems going forward. But that's what's driven it so far.

And I will squeeze in one quick one on physicians trained. I am just curious. So basically in general surgery specifically, if you have got a sense of roughly how much of your growth is being driven by new physicians being trained? And how much is just kind of an improvement in same-store sales, so to speak? And how much runway we might have left before kind of new surgeons trained in general surgery as a driver?

Hi Amit. It's Patrick. We see a pretty balanced growth across both new surgeons who are starting da Vinci general surgery for the first time as well as those who continue to expand their practice by either doing more patients within the existing procedures that they have been performing as well as adding new procedures to the list that they have been performing over time.

Good afternoon. Gary, I had one quick question on some pipeline dynamics. I may come back to the cost after that, but just two things. You reiterated the SP regulatory timing end of this year. Is it a good estimate for us for commercial launch for SP first quarter 2018? And the second part of that question was just on flexible catheter. You talked about the regulatory pathway, but could you give us any sense of 510(k) PMA? We have been assuming 510(k). And whether there is any commercial timeline that you could share?

Sure. So on SP, we don't know exactly the launch date, just given what questions we might get back from FDA. So we have that as well as finalizing some of the supply chain work we want to do. But we are working hard and solving the problems that we think we need. So I don't have any additional update for you on the SP commercialization ramp. We will report you when 510(k) goes in and what we think about it. On the flex side, likewise what we described in the script. We are making good progress on developing the technologies and finalizing our regulatory approach. We believe it's a 510(k). We will find out. FDA has a say on all that. But our plans are such that it's 510(k). We have not set a launch date yet for public consumption.

Okay. And then just coming back to spending, either for Gary or Marshall. The thing about 2017 was, you wanted to invest at a greater level because you had a lot going on in the pipeline. By our math and your guidance for next year for flat margins is consistent with our model. But it basically implies about $1 billion in R&D and combined SG&A which is a nice big round number. Can you give us any sense of the spending involved? I think investors are totally comfortable with increased spending if they think that spending is going to generate a higher return. So the kind of things you are working on for next year and why that level of spending is necessary? Thanks so much.

Sure. It's a good question. As Marshall said, we haven't really changed our view of what kind of spending is required in 2018, just a little bit of a math of 2017 changes relative to what the total operating margin looks like. With regard to what we are investing in, we go from essentially a single platform in the field in multiport da Vinci to SP, which is a new patient side plus accessories and instrumentation as well as flex catheter, which we think is really important. So on the R&D side, you have got broadening of platform lanes. And we think those are important because they don't get developed in a year. They take both technology development as well as technique development and all the commercialization steps that you all are well aware of. So that's kind of one side. The flip side is, a set of investments are on making sure that we can support the scale of the business in the multiport space and that has to do with making sure your factories are right and you have invested in plants and equipment and you get the advantages of scale as you grow. And we have started to see that at the gross margin line, the improvements and the performance above some of our earlier expectations are the result of some hard work in manufacturing efficiencies, which I think I would be supportive of riding it shoulder side. I think it makes a lot of sense. Those are really the investment priorities. There is a little bit in there about data generation in local markets to support the needs of our customers in the markets in which they operate, be it clinical data or economic data. So that picks up, that rounds out kind of the investment profile. Probably not a surprise to you at all.

All right. Thanks, Gary.

Great. Thank you very much for taking the question. So the first question I wanted to ask is for Gary. I noticed obviously that TransEnterix has got an FDA approval and what struck me as interesting is they got approval for 23 different indications, 23 different types of surgeries, some without data. And I was just curious, does this suggest that FDA might be willing to approve multiple indications? And could this potentially advance some of your timelines for the different indications that you are looking at for SP and some of your technologies?

Yes. It's a fair question. So the first thing is, the use of kind of one set of data to get additional procedures, that's something that was discussed with FDA in their workshop a couple of years ago and has been employed by us and by others. So the idea that there are some procedures that are kind of the key data generators that create an umbrella for other procedures is not a surprise to us. It is something that we have worked with FDA on, and we are not surprised that others are likewise using it. I think with regard to what evidentiary requirements are, which is a little bit underneath your question, the issue there is that how FDA views this is what you ask for in terms of labeling and claims and the relative evidence to support that are linked. Whether this signals a change in FDA's posture, you really have to read the specifics of the labeling as well as what the submitted data was. We will do that carefully when it comes out and we will assess whether their posture has changed or not. But on its surface, just reading what you have seen so far, what we have seen so far, A, we are not surprised that there are a set of procedures and kind of the devil is in the details is how they viewed it.

Okay. Fair enough. So we will follow-up after we get more details there. And then I apologize, Marshall, just one more on the 2018 comment. I assume from the comments and some of the math that what you are implying here is a double-digit level of increase in OpEx in 2018. Is that a fair assumption?

Well, we will provide you guidance when we get to next quarter. We are ready to commit to what the increase would be. It's just that as we sit here today, we would imagine that we would not be adding leverage to the model. Our spend in 2017 to-date has been right where we thought it would be. Revenue has come in pretty well. And our margins and other costs have been where we have expected them. And so it just changes the profitability relative to what we were thinking nine months ago.

I mean that's really the basis for the question. I am trying to get at what percentage of this could be associated with just increased confidence in the outlook for revenue growth next year?

So we will get to the guidance for you in the next quarter.